Avoiding Legal Traps in CRE: Practical Tips for Navigating Documentation

[00:00:08] Welcome to the CRE Project Podcast, the show where we take a deep dive into the world of

[00:00:14] commercial real estate. I'm Clayton King, your guide through the complex environment of commercial

[00:00:19] real estate. So, whether you're looking to invest, develop, or simply understand how commercial

[00:00:26] real estate shapes our cities and economies, the CRE Project Podcast is your ultimate resource.

[00:00:48] Richard, welcome to the CRE Project Podcast, man. It's great to have you on today. Thanks so much for

[00:00:53] taking the time. Thank you. Happy to be here. Great show. Looking forward to it. Obviously,

[00:00:58] always good to have a legal perspective on what we do in the commercial real estate space. Excited

[00:01:04] to dive into a myriad of different topics here. But really, to start off, I'd love to

[00:01:09] kind of hear your background. You know, you've been in the industry now in this space for decades, but

[00:01:15] do you come from a family of real estate attorneys? Or how did you kind of decide that this was the

[00:01:21] route that you wanted to take? How'd you end up where you are? Yeah, the path was an interesting

[00:01:26] one. I actually grew up in a family of doctors, so I went over to the dark side by practicing law.

[00:01:31] So I was somewhat the black sheep in that regard. But it was actually one of those discoveries during

[00:01:36] college, the traditional going to career services. What do you specialize in? And I also was majoring

[00:01:42] in finance and economics. And so I definitely wanted to do something with business. And so that's that

[00:01:48] seemed to be the natural trajectory for doing business law. And I'd say a large component of that

[00:01:55] is commercial real estate. But I was I was very fortunate. Yeah, it's been about two dozen years

[00:02:01] that I've been practicing. I've been with the same firm that entire time, which is rare. I was very

[00:02:06] fortunate when I joined this firm to have two very good mentors. And that's just I think that's key

[00:02:13] regardless of your discipline, definitely lessons learning, the learning curve. And you get to learn

[00:02:18] what mistakes they made as well that help you improve more quickly as well. I had one mentor who was

[00:02:25] very good about the technical issues and what to look out for and where to be concerned and what to be

[00:02:31] afraid to miss. The other mentor basically taught me everything else, everything they don't teach you

[00:02:37] in law school. And he was great about just teaching me how to attract clients, manage clients and

[00:02:44] communicate and the business side. And he was definitely a person where I don't think being an attorney was

[00:02:50] ever his his end game. I think it was a stepping stone into other venues had an incredible business

[00:02:56] mind was in a lot of deals as well and definitely taught me to communicate directly with clients,

[00:03:00] answer their question. If you don't know the answer, be forthright with the client, but tell them you'll

[00:03:05] get the answer. I don't necessarily think about him every single day, but I certainly use things he

[00:03:10] taught me every single day without question. And he's doing well. He's down in South Beach teaching yoga

[00:03:16] and doing yeah, living his best life, uh, doing Russian acrobatics, getting into acting. Yeah.

[00:03:23] Yeah. It's, um, living the dream. I love it. Yeah. At about 60 years old, he's, he's, he's definitely

[00:03:27] living the dream. That's for sure. I'm sure he's, uh, I'm sure it'd make him smile to hear you say

[00:03:32] that too, that, you know, he had a lasting impression on you and that's definitely success from a mentorship.

[00:03:38] And I agree with you having a good mentor is everything, no matter what industry you're in,

[00:03:42] but especially a professional industry, whether it's, you know, commercial real estate and obviously

[00:03:47] the law. That's great, man. Really quick before we move on, I am curious, like what is the hardest

[00:03:52] part about starting out as a commercial real estate attorney? I mean, I could speak as a broker,

[00:03:58] but from your perspective, what is, is it the learning or is it the actual business generation

[00:04:03] and actually getting those clients? I'd love you for you to just talk about that for a second.

[00:04:07] Probably the most difficult part is the learning curve, because when you go to law school,

[00:04:12] there's a lot of, a lot of what you're taught is theory and you can go through all of law school

[00:04:17] without actually looking at an easement or a promissory note. What you do is you study cases

[00:04:22] about those instruments and how they went. And even on the bar exam, you get tested on the principles,

[00:04:28] but a lot of the just a more granular level of learning about what does this instrument mean?

[00:04:34] Why does it exist? Why does, for example, the lender want it? All of those nuances, that's something

[00:04:39] where it is somewhat baptism by fire. And you have to learn that very quickly, particularly if you're a

[00:04:44] younger attorney and you don't have as much real world experience at the age of say 25, when, when

[00:04:51] a lot of attorneys get started. So I'd say that is probably a difficult part. And the other part,

[00:04:57] I think this comes to a lot of the communicating directly with clients is you have a lot of entrepreneurs

[00:05:02] that are very business minded. Everything is very time sensitive. And my, my mentor did impart to me

[00:05:08] that time kills deals. And so one thing that you have to become very good at is obviously doing a

[00:05:14] thorough job, but meeting the timelines, maybe even finishing in it and less than the deadline, because

[00:05:20] time does kill deals and you never really want to, you never want to be the person that's basically

[00:05:24] holding up the transaction. So, um, but sometimes that accelerated pace can preclude deliberation.

[00:05:32] So you have to have a lot of fail safes in place in terms of being organized and having a relatively

[00:05:38] standardized work product so that you don't miss anything because people are relying on you and you

[00:05:44] don't want to make any sort of expensive mistake because yes, millions of dollars are going to be at

[00:05:48] stake. So you have to strike the right balance in that regard, right? So that's probably the biggest

[00:05:52] challenge for starting out. Yeah. I don't think you probably heard through the headphones, but I think

[00:05:57] the whole audience was probably cheering, hearing you an attorney say quick turnaround. Cause I can

[00:06:03] tell you I've dealt with several attorneys where it's like three weeks and where are we at guys?

[00:06:09] Yeah. Now haven't heard from you. So, uh, I appreciate you saying that time kills deals, but I also

[00:06:15] appreciate the fact that you did say, and it's funny, it's good for guys like me to hear that. And I'm

[00:06:20] sure a lot of people in the audience that we're so entrepreneurial type a let's get it going. Let's

[00:06:26] just get it done. And to your point, it's like, guys, this is, you know, this is a 60 page document

[00:06:30] with a lot of different details. Like let's make sure that we're agreeing to something that we're

[00:06:36] willing to agree to. And there isn't any tricks in here. And to your point, like me, I rely on my

[00:06:42] attorney. So I expect you to go through it and give me feedback. And if something comes up,

[00:06:47] not that there's going to be fingers pointed, but you know, there's obviously going to be some

[00:06:52] culpability on the attorney side because I rely so heavily on you guys. So anyway,

[00:06:56] yeah, I appreciate you saying that. I will say one thing that's a game changer for attorneys.

[00:07:00] And this comes with, with experience as well as when you have a good team backing you up,

[00:07:06] it's very invaluable because we're structured. Like a lot of law firms would be where you have a partner

[00:07:11] at a certain billable rate that that's going to handle things more high level. But a lot of the, um,

[00:07:15] changes to the documents, he may have an associate do, he'll still see it,

[00:07:19] but we have a very good program where I see everything. I mark it up, farm it out to the

[00:07:25] associates to make the revisions. And then I see the revisions. And I think it not only has

[00:07:29] a faster turnaround on product, it's more cost effective. And I think the product is better

[00:07:34] because you have multiple eyes on it too. So that's, that's just one of those. If you have

[00:07:38] a good team in place, it definitely makes a world of difference.

[00:07:40] Yeah. Yep. No doubt. Well, great, man. Thanks for giving some background on, on who you are and how

[00:07:46] you got to where you are and how to succeed when you're starting out. I think that's all valuable

[00:07:49] information. So let's dive in a little bit. Let's start off with just acquiring a property.

[00:07:55] I buyer just put a commercial property under contract and well, actually before we even start

[00:08:01] there, how about this? I have a signed LOI and I connect with you to draft a purchase agreement.

[00:08:08] What exactly do you look out for when drafting a purchase agreement on behalf of buyer and seller?

[00:08:16] If you can give kind of both perspectives on that. Yeah, I go when I'm reviewing documents or

[00:08:21] preparing documents, the first section I'll look at, even if it's not sequentially at the beginning

[00:08:26] of the document is the remedy section, because it's always critical to know how are things handled if

[00:08:32] things go sideways. And so I'll typically in the remedy section, if I'm representing a seller,

[00:08:38] I want to basically cap their liability. If they're making any representations and warranties,

[00:08:45] I don't want those to survive terribly long after closing. If there are certain defaults

[00:08:51] on the part of the seller, I usually don't want to have them exposed to much liability for minor

[00:08:57] defaults. But if there's something that's willful where they basically knowingly sell the property to a

[00:09:03] third party in violation of the contract so that the buyer cannot use specific performance

[00:09:09] as a remedy. It is fair for them to reimburse the buyer for that, but I still like to cap their

[00:09:16] exposure to maybe depending on the deal, maybe 50,000, maybe a hundred thousand dollars of out-of-pocket

[00:09:21] expenses so that the seller doesn't have possibly millions of dollars of liability. And again, this is

[00:09:29] if specific performance is not available from the purchaser side, I definitely look for the usual

[00:09:35] things. If the buyer defaults that they, you know, they simply forfeit their deposit. They're not

[00:09:40] subject to additional damages from the seller. And I do want to try to give the buyer as many

[00:09:47] opportunities to have extensions in the contract without the seller basically playing gotcha if they

[00:09:55] miss a deadline. So whether they're reviewing title or they're coming up on the expiration of their due

[00:10:00] diligence, I like to have some built-in automatic extensions, even if they have to post additional

[00:10:05] deposits for that, just to keep their deal on track because things oftentimes take longer than you

[00:10:10] anticipate. And sometimes financing takes longer or interviewing tenants may take longer as well. So,

[00:10:15] so I like to build in a lot of those fail safes for the buyer. You know, in the time that I've

[00:10:20] practiced, you've seen this concept go back and forth. But one important thing is I still try to

[00:10:25] have financing contingencies in favor of the buyer. And that's gone back and forth in the early 2000s.

[00:10:32] Nobody would agree to that because if you could fog up a mirror, you could get a loan and it was great.

[00:10:37] You know, it was 85, 15 percentages. And that's changed over time. And it seems like more,

[00:10:43] more people are willing to accept that from the seller side, usually if it burns off at some point.

[00:10:50] So maybe not all the way up until closing, but maybe slightly, maybe a week or two after the

[00:10:56] expiration of the due diligence period, they might have a separate financing contingency deadline.

[00:11:00] It's just another thing I like to put in there to, um, to protect the purchaser if I can.

[00:11:05] So I'm curious in your 25 years of practicing, how many times have you seen specific performance

[00:11:11] be exercised?

[00:11:14] So usually I've actually never seen a case completely carried out. I have seen it

[00:11:19] initiated or certainly threatened if it, if it looked like the deal was going sideways. And for

[00:11:24] some reason the seller hadn't yet sold it in Virginia. And there probably are comparable, um,

[00:11:31] filings that can be done in other states, but in Virginia, it's the Liz pendants is what they call

[00:11:35] it. And so basically your purchaser can say, Hey, you know, hold up. I'm filing this in the land records

[00:11:42] and I have a, I have an interest in this property. I may not have bought it yet,

[00:11:47] but I have a contractual interest in this property. And that's one of those things that's

[00:11:51] very effective because it does create a cloud on title. Any third party, particularly if they've

[00:11:55] gotten a title report, which they should have, uh, is going to see that. And they're not going to want

[00:12:00] to close if they know it's, they're basically closing subject to existing litigation. Usually it's just

[00:12:06] resolved itself before a judge actually awards specific performance, but it is one of those

[00:12:12] things that it can be very effective to, to basically set things straight. I'm curious,

[00:12:16] and this may be a dumb question, but that's why we're on here. Right. To learn in situations like that,

[00:12:22] does it typically go to mediation ever? It can, particularly if you have provisions in your

[00:12:27] contract, uh, that basically contemplate alternative dispute resolution, but that can be a very helpful

[00:12:34] way to avoid the expense and mainly the protracted timeline of going to court. I mean, you've,

[00:12:41] you've probably heard nobody really wins going to court because it's so expensive to do it. And you can

[00:12:47] ask for things like attorney's fees and things like that, but there's no guarantee that you're going to

[00:12:51] get them. But mediation can be a hopefully level headed way to get to a common ground and basically have

[00:12:58] both parties realize we don't really want to undertake the expenses and the delay of litigation.

[00:13:04] Let's work out something that's mutually acceptable. So it doesn't usually just, I mean,

[00:13:08] or does it like specific performance? Does it just escalate directly to a trial or it, I guess it

[00:13:15] depends on what the contract says is what you're saying. Right. Yeah. And it's, it's usually,

[00:13:19] I guess, from a practical standpoint, um, having, uh, something like a Liz pendants filed,

[00:13:25] we've never seen a seller be able to get past that once that cloud on title is created to basically say,

[00:13:32] you know what, go ahead and sue me for specific performance. We'll see how it goes. Uh, cause

[00:13:37] they realize that their, their hands are going to be basically be, um, tied in terms of getting their

[00:13:41] deal done. Yeah. Interesting. Yeah. I'm a big fan of mediation. I think it's an effective tool

[00:13:48] that is definitely more time and cost effective, uh, when it comes to dispute. So yeah, I was just

[00:13:54] curious cause specific performance is always in contracts and I'm just, you know, again, doing this

[00:13:59] for 25 years. I'm I've luckily never been in that situation before. So I'm just curious on how often

[00:14:05] that's kind of executed. So, so you brought up title huge part of the due diligence process. So we get

[00:14:12] the title report. What do you specifically look for in the title report? There are quite a few things.

[00:14:19] One thing that people oftentimes overlook and discount, and, and I understand why, because it's,

[00:14:25] you've got a set budget for getting an acquisition done. You probably want to minimize the number of

[00:14:30] third-party reports or expenses, or you want to be able to rely on existing reports if you can. But

[00:14:36] one thing that's very important that actually becomes integrated with your title commitment is a

[00:14:41] survey. Although it's expensive, I do prefer an Alta survey because it physically depicts the easements

[00:14:48] and the extent to which they affect the improvements on the property. Because you can read an easement

[00:14:54] that you, you'll, you'll get that with any title commitment. They'll give you backup documentation

[00:14:58] of everything that appears in their title search. Uh, but you can't always tell to what degree those

[00:15:03] easements impact the property. But when the surveyor goes out there, he, he uses the title commitment

[00:15:08] as a guide and he'll actually depict on your property things like whether you have an easement going

[00:15:13] through the middle of the building, things like that, that obviously would be very expensive to deal

[00:15:17] with if they weren't caught. And so usually in our title commitment and without getting too granular

[00:15:23] about it, we usually have the title commitment, which will eventually become the title policy,

[00:15:28] basically say that this title commitment or future title policy is ensuring not only the legal

[00:15:34] description that's in the seller's source deed, but also that survey prepared by so-and-so dated such

[00:15:41] and such. So that it's very clear that you're getting the property that you think you're getting

[00:15:46] and that there are no exceptions from coverage. So that's a common thing. And probably a lot of the

[00:15:52] people on this call or listening to the podcast have heard about this is your lender oftentimes will

[00:15:56] say, we'll rely on an old survey if we don't have a survey exception. And your survey exception is

[00:16:01] basically, it's pretty broad in terms of what it accepts. It basically says,

[00:16:05] if you fail to get a survey and there's some sort of encroachment or some other adverse title

[00:16:12] condition, and it would have been revealed by an accurate survey, you're not getting coverage for

[00:16:18] that. That's why you never want to have a survey exception. It's helpful to have the same as survey

[00:16:23] endorsement. And there are other endorsements that are very comprehensive that are helpful to have that

[00:16:28] usually you're going to need to have a survey for like an all-to-nine subdivision endorsement,

[00:16:33] separate tax lot endorsements. Because if you look at a typical title policy, it's like most

[00:16:37] other insurance policies you look at. There are a lot of things that are accepted out that people

[00:16:42] wouldn't even think about. And that's why they have these endorsements. And that's why your lawyer will

[00:16:45] typically ask for these endorsements. But that is one of those things that why surveys are so key.

[00:16:52] Otherwise, generally speaking, some of the other things we just look at for the property is whether

[00:16:57] there's clear access to the property, whether it's clear as to how the property drains,

[00:17:03] and that can make a big difference depending on which jurisdiction you're in in terms of the

[00:17:07] topography there. Also, are there any sort of declarations or reciprocal easement agreements

[00:17:13] that are impacting the property? Specifically, if you have any monetary obligations under those

[00:17:20] instruments on an ongoing basis, you're going to want to know about that. And similar to the concept

[00:17:27] of tenant estoppels, you're going to want to have an estoppel certificate signed by the association or the

[00:17:32] beneficiaries of the association that basically say everything is copacetic. There are no defaults.

[00:17:38] All the payments are current. Because again, you just you never want to be buying a lawsuit.

[00:17:42] And so that's just another one of those title issues that you examine. And if the property has

[00:17:47] already basically been improved and developed, you'll also want to use a zoning report. It'll assess

[00:17:53] things. It'll look at the survey. They'll examine title to some extent, but mostly the survey

[00:17:58] to make sure that you're compliant as it pertains to setbacks and any sort of ordinances that may be

[00:18:05] in place, particularly for parking, that you basically have parking compliance. You know,

[00:18:09] I've referenced basically three different third party reports, but they all go hand in hand. And so

[00:18:14] when we're giving, I just call it a title review letter to a client, it's going to cover all of those

[00:18:21] components of title survey and zoning and how they interrelate. Because again, those are one of those

[00:18:26] things might not seem like a big deal at the time, but they can just be very expensive mistakes down

[00:18:31] the road if you overlook them. I'm pretty outspoken when it comes to my clients and transactions and

[00:18:38] getting an also survey. I just tell people all the time, you know, you're talking, I mean, in New

[00:18:42] Mexico, they can be 25 to, you know, 2,500 bucks to $4,000. But when you're buying a million, $2 million

[00:18:49] piece of real estate to have a visual look and yes, to your point, you can read the title commitment,

[00:18:55] you can read the easement, but the average eye doesn't understand them. So to see that from a

[00:19:00] visual standpoint, actually laid out on the site, you understand what you're buying and you're just

[00:19:07] going to limit your risk. So yeah, I'm always a huge advocate and it always surprises me when people

[00:19:11] don't want to pay for an Alta survey, but to each zone. But yeah, it definitely helps understand the

[00:19:17] property more. So before we leave title, I am curious and you touched on it, but maybe more directly,

[00:19:22] I'd love for you to answer what endorsements specifically would you recommend buyers?

[00:19:28] Yeah, there's, I would say probably the most Alta nine is, is very common. You'll usually get that.

[00:19:35] Honestly, I'll send a list of probably 10 or 12 endorsements on every deal to the title company.

[00:19:41] And that'll basically be like your address endorsement. We'll have other things like access

[00:19:45] endorsements, the same as survey endorsement, subdivision endorsement, basically anything

[00:19:50] that basically is going to create a complication for you. If it's not already insured over,

[00:19:55] those are some of the more common ones that we pretty much always get. And then there's some more

[00:20:02] specific ones that are more on a corporate level, if there are changes in membership and things like

[00:20:07] that. But I'd say those are, those are the big ones that we typically request.

[00:20:10] Okay. Awesome. I just like to touch on that because that always seems to come up and a lot of people

[00:20:14] don't understand what endorsements are beneficial to get. So, so pivoting a little bit, let's talk a

[00:20:20] little bit about the actual financing side of an acquisition and the partnership structuring of an

[00:20:26] acquisition when it comes to commercial real estate, since you specialize in that as well. So

[00:20:31] explain to us a little bit, what is the difference between a partnership and a syndication?

[00:20:38] That's a good question. And when you say syndication, I'll primarily speak about just

[00:20:43] when people form limited liability companies, but with partnerships, you have different structures.

[00:20:49] So you can have a general partnership and that's where basically all of your business partners,

[00:20:53] you have unlimited liability for their actions. You tend not to see those very often. Most people

[00:20:59] are savvy enough to not have a general partnership structure. You can have a limited partnership

[00:21:05] structures where basically, you know, the asset say there's an office building or a shopping center

[00:21:12] is going to be owned by a limited partnership and the LPs. And that, that still is common

[00:21:18] vernacular that you hear, even if it is an LLC, people will still say LPs to describe their investors

[00:21:25] and so on. So that structure is what was more common until I would say probably maybe the late 1990s.

[00:21:32] And then a lot of states started to adopt the limited liability company. And one thing that was

[00:21:40] more attractive about it is you could still have a lot of the benefits of limited liability, you know,

[00:21:46] instead of partners, you have members, you know, in their, their corporate equivalent would be shareholders.

[00:21:53] Um, but you have a lot of flexibility in how you can handle issues like corporate governance. So you can have

[00:22:00] a manager of that entity that basically is going to handle a lot of the day to day operations. Most of the key

[00:22:08] decisions, there may be certain decisions that require a certain percentage of member approval, but people

[00:22:14] really liked the structure of a limited liability company because you could achieve the benefits of the LP

[00:22:21] structure, but not have quite the extent of corporate formalities as well. That's been a large reason why

[00:22:28] those seem to be so easy to adopt because they're relatively easy to form. The operating agreement is

[00:22:35] pretty comprehensive in terms of handling issues like not only governance and authority, but how all of the

[00:22:42] distributions are going to be handled and whether you're going to have preferred returns, subordinate returns,

[00:22:47] pro rata allocations, it can be a fairly succinct way to basically encapsulate all of those rights and

[00:22:54] responsibilities between the manager and the investors or the members. And so I think that was,

[00:23:00] that was a large reason why LLCs became such a popular tool for a lot of these real estate investments.

[00:23:06] Where do people get, for lack of a better term, screwed the most when it comes to LLC partnerships and the

[00:23:14] operating agreement? Where should people pay the most attention? I would say from the investor's

[00:23:20] perspective, look very closely at the materials they put together, the private placement memorandum,

[00:23:27] the subscription agreement, and be very, it needs to be very clear in there what sort of fees are being

[00:23:34] charged by the, I'll call them the sponsor. Some people use the term syndicator or promoter because

[00:23:40] they may be charging an acquisition fee, a disposition fee, a refinance fee. They may also have a third,

[00:23:48] well, I wouldn't even call it a third party, an affiliated property manager that's also charging a

[00:23:52] fee. All of those fees should be disclosed up front and they shouldn't really be buried in a footnote,

[00:23:58] but those are things where you just want to avoid surprises down the road. And that's advice that I give to

[00:24:04] sponsors as well is disclose that stuff. I mean, you want to be able to explain anything with a straight

[00:24:09] face. If you're taking a fee, you don't want to just take the fee and then either hope people don't

[00:24:14] notice or that they'll understand that it's a commonplace. You want it to be reduced to writing

[00:24:19] so that there are no surprises. One other thing, you know, this is really something I suggest to

[00:24:25] both sponsors and investors is to basically have some sort of objective measures that help you track

[00:24:34] performance of the manager. Because as you can imagine, you probably have anecdotes of your own

[00:24:40] too. When the deals start, everybody's excited. You know, it's like falling off a log, the deal can't

[00:24:45] lose. And sometimes people are very relaxed about papering all of those details. But I think it is

[00:24:52] very helpful if you have a circumstance where maybe a manager has not rendered a return for maybe several

[00:24:59] quarters to have mechanisms where they can be removed for cause if they don't provide a business

[00:25:05] plan. That benefits both sides because it also gives the sponsor a clear idea of, okay, what are the

[00:25:11] objective criteria in which I'm being analyzed? The investors also realize that this manager is

[00:25:16] underperforming. We're not stuck with him until the property sells. So that would be another thing I would

[00:25:21] do. And I would say in terms of things that people miss is having some pretty clearly defined exit

[00:25:30] strategies from the investment. So that can be something where it happens. It's very intentional

[00:25:35] on a date certain or upon a certain event, like a sale or refinance or somebody's trying to 1031 out.

[00:25:42] But it can also be for those things that maybe aren't necessarily planned, but they're accounted for

[00:25:47] in case they happen. And that could be something like, whether it's a manager or a member, could be

[00:25:52] a death, disability, bankruptcy is another example. Or it could just be something where a member wants to,

[00:25:59] the project is not doing as well as they had hoped. They're not meeting the numbers. And maybe it's not

[00:26:04] quite enough to remove them for cause, but they still want to disassociate if they can. And basically

[00:26:10] by having some clearly laid out mechanisms for selling or transferring your membership interest and

[00:26:17] basically getting out of the investment, you can definitely bypass the likelihood of litigation

[00:26:23] or continuing to lose money on investment. There are a couple of different mechanisms that you'll see

[00:26:29] for that type of thing where, and again, this could just be a disassociation. I just want to get out.

[00:26:35] And usually you'll have like buy sell provisions. Sometimes people will call them shotgun clauses

[00:26:39] that'll have pretty clear criteria for selling your interest, how the fair market value of your

[00:26:46] interest is going to be calculated, what sort of notice you have to give. And usually I would say

[00:26:52] 99 times out of a hundred, there probably are going to be restrictions on those transfers

[00:26:57] because the other members and the manager are going to want to basically retain control of that project.

[00:27:03] They don't want a lot of miscellaneous third parties getting involved with the asset. So they're going

[00:27:09] to want to basically have a right of first refusal to buy those membership interests. So those are a lot

[00:27:14] of mechanisms. You can have call options, put options, tag along rights, drag along rights,

[00:27:20] and these are all designed to basically protect that. It could be a minority member that wants to

[00:27:25] be able to sell its interest. Sometimes it wants to buy the interest from the manager. So, but you,

[00:27:30] you see those provisions basically go, go both ways. So that's another area where people oftentimes tend

[00:27:37] to overlook it. Those are some of the initial things that come to mind in terms of where people

[00:27:41] can get hurt in an investment. It is not documented correctly. That's what I always laugh. They always say,

[00:27:46] you know, contracts are drafted for the good times. Right. That's exactly right. They're drafted for the

[00:27:52] bad times, but often they're, they're signed and executed when things are good. So, and it's funny you

[00:27:58] bring up fees too, because I haven't personally experienced it, but I've heard that being a big

[00:28:04] problem, you know, uh, sponsors taking fees when the project's not doing well and not performing as

[00:28:10] they said it would perform, but yet they're still getting paid. So definitely something to,

[00:28:15] to look out for there. Talk to us a little bit about when is it appropriate or beneficial

[00:28:20] to acquire real estate as a tick or a tenant in common versus a LLC? What are the benefits behind that?

[00:28:28] That's a great question. And it's actually very important that this be,

[00:28:31] that people get this right because this has popped up more on the IRS's radar in terms of scrutiny.

[00:28:38] So for doing a 1031 tax deferred exchange, probably most people on listening to the podcast are aware

[00:28:45] of that, but basically you're allowed to defer the taxes on your gains when you sell a property,

[00:28:50] if you structure it correctly. For example, if sale proceeds are parked with a qualified intermediary and

[00:28:57] you yourself don't touch the property. And then those proceeds are used to acquire a replacement property.

[00:29:03] That's a very oversimplified explanation of how it works. But one interesting restriction on that,

[00:29:09] that the IRS has required is that you can't simply have a partnership interest or a membership interest

[00:29:15] in an LLC and, and basically do a 1031 that way. You actually have to be a co-owner of the property.

[00:29:23] Whereas the typical syndication structure that we talk about is very typical. You won't be able to

[00:29:29] do a 1031 unless you have basically set up your own LLC that co-owns the property with one or more

[00:29:36] other LLCs. And so that's basically that it bifurcates the ownership more cleanly so that if you do 1031,

[00:29:43] it's easier to track the proceeds from that. But what the IRS really scrutinizes is they're going to look

[00:29:50] at the tenancy in common documentation that's required or the tick documentation that's required.

[00:29:56] And if that looks too much like a partnership, they're going to basically say, no, this, this doesn't pass muster.

[00:30:03] This is taxable boot based on the gain. And we're not going to let you avail yourself to a 1031 tax deferral.

[00:30:11] Educate me and the audience a little bit. What is the difference between a tenant and com,

[00:30:15] like a tenancy in common document versus a partnership document? What specifically are they looking for?

[00:30:21] So with a typical partnership document, you're going to have a key principal, usually the manager,

[00:30:27] who's basically administering the property on a daily basis, obtaining financing, making key decisions,

[00:30:33] signing everything, basically making all the major decisions without necessarily getting all of its

[00:30:39] members to sign off on every little thing. With the tenancy in common structure, everything is handled,

[00:30:45] like a co-ownership, which may sound mind numbingly difficult from an administrative standpoint.

[00:30:52] And it can be, but basically a tenancy in common agreement is basically going to acknowledge we

[00:30:56] both own this property. We make all decisions together, including the decisions to sell,

[00:31:02] the decisions to encumber the property, even the decisions to lease property. And so that's one of

[00:31:06] those things where it seems very cumbersome from an administrative standpoint. And usually they record a

[00:31:12] memorandum of tenancy in common so that everybody's on notice that it's a TIC structure. But one thing

[00:31:17] that actually the IRS does seem to allow is for the tenants in common or the TICs, as we call them,

[00:31:24] they can sign basically an asset management agreement that will appoint those functions to,

[00:31:30] it can be a third party, so that basically from an operational standpoint, things flow a little bit

[00:31:39] drafted and articulated. But that's one way to basically make it so that it's not so much of an

[00:31:43] administrative headache by having to get the co-owners to agree to every single little thing.

[00:31:48] One other key difference that I had left out is in a typical operating agreement for a typical syndication,

[00:31:56] you're going to have pretty detailed provisions on the waterfalls in terms of how returns are distributed

[00:32:01] and so on. You really can't have that in a tenancy in common structure. So usually your tenancy in common

[00:32:08] documents are going to basically reflect more of a pro-rata allocation rather than a preferred return,

[00:32:15] subordinate return, and then a pro-rata split at the end. So that's just another key thing that the

[00:32:20] IRS will closely look at. And they still do a review based on the totality of the circumstances.

[00:32:26] So if you're hitting maybe eight out of ten of the factors they'd look at, it's probably going to pass

[00:32:30] muster. But if you're only hitting like one or two, the IRS is probably going to frown upon it and

[00:32:34] say it's taxable. So I guess one thing to take away, ticks are more beneficial if you plan on

[00:32:42] selling and kind of going different directions as partners, right? That's right. They're easier to

[00:32:46] 1031 exchange. The second takeaway is you better make sure that you like who you're getting into that

[00:32:51] agreement with, it sounds like, because you're going to have to agree pretty much on everything.

[00:32:57] Um, there's not really that point of contact that's kind of steering the ship. You got to make sure that

[00:33:03] you have, I guess, a direct alignment with whoever you're entering in that agreement with, it sounds

[00:33:09] like. That is true. And you can make the asset management agreement fairly detailed. So you could

[00:33:15] say something like leases that meet the following criteria will be deemed approved by the parties and

[00:33:21] things like that. So there's certain things from a prophylactic standpoint you can do to make it go

[00:33:25] more smoothly, but you're right. Uh, cooperation is still going to be key with, with a co-owner

[00:33:29] structure like that. Yeah. What do you see more of? I'm curious. Do you see more LLCs than techs?

[00:33:36] I would say in generally, yes, it ebbs and flows, but now I would, I would say for some of the smaller

[00:33:41] deals where maybe you only have like three or four members that may lend itself to a tendency in common

[00:33:48] structure more, particularly if they're not thinking of holding the property for, you know, more than

[00:33:54] like seven to 10 years. So you'll see it there, but in these deals where you have 35 or more investors,

[00:33:59] it's just less common because it's, it can be done, but it's just a tendency in common documentation for

[00:34:06] that many investors is just, it's a lot more difficult to administer. So would it be accurate

[00:34:11] to say that a tick is more of a quote unquote true partnership versus a, and I know I'm, I'm using that

[00:34:22] from a legal standpoint is very different, but just in a, in a broad stroke standpoint is a tick

[00:34:28] more of a true partnership than an LLC. On, on the surface, particularly if you don't have an asset

[00:34:34] management agreement in place, um, it would be like if you and I just owned a property together. I mean,

[00:34:40] of course it's, it's in the names of LLCs as tendency in common, but, uh, yes, it's much more of a co-ownership

[00:34:46] structure than, than what you would have with a syndication. But if you're raising money to buy a

[00:34:50] property, you want to structure it as an LLC, cause then you'll have, you'll be the manager and the main

[00:34:57] point of contact, main decision maker, obviously depending on what the operating docs say, correct?

[00:35:03] Yes. And I would say particularly if you have a number of investors involved, that's, that's a much easier

[00:35:07] structure to administer. More, more efficient process. Okay. Yes, for sure. Any other structures

[00:35:12] that the audience should know about? Um, one other one that we see, uh, on occasion is you might have

[00:35:20] a deal where you have a developer and you have another party that owns the land and they're trying

[00:35:25] to figure out how to basically do a joint venture. And so a lot of the concepts are similar to what we've

[00:35:32] described with operating agreements for LLCs, but it may be one where they both basically both of their

[00:35:37] LLCs form an LLC, uh, that basically handles the allocations and distributions that are going to occur

[00:35:44] for that particular project, but they still have siloed off their respective portions. So that's one,

[00:35:50] one thing that we sometimes see with joint ventures that are, it'll be drafted a little bit differently

[00:35:55] from what you'd see with a syndication. Um, but that's one other structure that we sometimes see,

[00:36:00] but, um, between partnerships, joint ventures and, um, tenancy and common agreements, that's most of

[00:36:05] what we tend to see from deal to deal. How, how are ownership percentages typically, I don't want to

[00:36:13] say, I mean, I know they're negotiated, but what, what do you typically see as an equitable percentage

[00:36:18] when that happens? I, I, I'm asking that personally, I'm curious because is it 50, 50, is it 60, 40,

[00:36:25] is it 70, 30? What do you typically see when you have a landowner that just wants to partner with a

[00:36:30] developer? It depends on the deal. I would say, um, whether it's 50, 50 or 60, 40, that's kind of

[00:36:38] the range of what we see for that. And so that's, that's generally what we've seen, but it also

[00:36:45] depends how many acres are being involved and how much time is going to be involved and so on. But

[00:36:49] that's kind of the range that we've seen. And does the owner, sorry, I'm going to get in the

[00:36:53] weeds here a little bit, cause it's interesting to me, but so does the owner deed over a percentage

[00:36:58] of ownership to the developer or how does that? That's a great, that's a great question. So, um,

[00:37:06] when this all starts, we'll just say owner LLC already exists and they own black acre and then

[00:37:12] developer LLC, they do their, you know, they're more of an operational company. They form a new LLC.

[00:37:17] That's basically housing their collective investment and how they're going to get paid and so on.

[00:37:22] Um, and usually owner LLC will actually, as part of all this, will deed his property to the,

[00:37:28] the kind of the JV LLC that they've created. So that for purposes of, of financing and, uh,

[00:37:34] any other closing documents and things like that, it's going to be in the name of the JV LLC

[00:37:39] and what the owner LLC has contributed by deeding its land to that, um, that L the JV LLC is it's

[00:37:46] basically like its initial capital contribution. So it could be, and usually there will be language

[00:37:52] in the joint venture documentation saying that we've attributed a value of say $3 million to the land.

[00:37:58] And that's basically going to be their capital contribution. And that's, that's also how returns,

[00:38:03] et cetera, will be calculated based on that amount.

[00:38:05] And when is that typically recorded? I mean, I know it depends too, more than likely, but like

[00:38:15] some of these development deals, right. They could take 18 months and then, you know, month 16,

[00:38:20] the tenant goes to committee and the deal dies, you know what I mean? So like we've all been in

[00:38:26] those situations. So when does, when does that ownership typically happen?

[00:38:32] It can depend if it's something where they're doing a lot of development, getting a lot of

[00:38:37] approvals. And it's something where dealing with the city for, or the County, for example,

[00:38:43] they want to have basically the name of the future owner on that. You can do it then,

[00:38:49] but you definitely have to have a written agreement saying, okay, if something, if this deal goes

[00:38:55] sideways for any of the following reasons, the property is going to be deeded back to owner LLC

[00:39:01] and there'll be some, some allocation of how, how they basically square up on costs that have

[00:39:07] been made. But that, that would be earlier in the process. You know, my preference would be basically

[00:39:12] to send it all into escrow and just be very clear about the sequence of what gets recorded so that

[00:39:17] the deed to JV LLC gets recorded first. And then like the mortgage instrument, the JV LLC signs gets

[00:39:23] recorded after that. And that's, that would be more comforting, but it doesn't always happen that

[00:39:28] way. So you just, you just have to have a clearly articulated agreement that shows how you get

[00:39:33] titled back. And for some reason it doesn't work. Yeah. It's again, I bring that up because I'm

[00:39:39] personally interested, but from the developer standpoint too, it could be extremely risky to,

[00:39:43] to risk 18 months on a project and you don't even actually have the ownership interest in the property

[00:39:52] yet. So, but as the property owner, you want to be hesitant about deeding ownership too quickly. So,

[00:39:59] I mean, I don't want to oversimplify it, but it sounds like it's, it always just comes down to

[00:40:05] documentation and making sure that you have, you know, understandable, fully, fully understandable on

[00:40:11] both sides, documentation stating that, Hey, if this goes X way, like you said, it'll be deeded back to

[00:40:17] the ownership. I didn't really know it was that easy to be completely honest. So, yeah. Yeah. And

[00:40:23] that's also one of those circumstances too, where you may have an attorney that's drafting the JV

[00:40:28] agreement, but it's probably doesn't hurt to have independent counsel reviewing it from both the

[00:40:33] owner LLC's perspective and the developer LLC's perspective as well too, so that you don't have

[00:40:38] any sort of allegations that there was a conflict or anything like that too. That would just be

[00:40:42] best, best practice. Yeah. Well, we went pretty deep there, man. So

[00:40:46] yeah, no, this is what I do every day. So that's interesting stuff, man. So, um,

[00:40:52] so let's pivot a little bit. Um, let's talk about what emerging trends do you see right now

[00:40:58] in the legal aspect of commercial real estate, anything out there kind of brewing?

[00:41:04] Uh, one thing that we've actually been making our clients more alert of is the corporate

[00:41:09] transparency act. And it's not, it's not brand new. It was enacted a while ago, but it, um,

[00:41:15] in terms of its effective date, uh, January 1st of 2024 was when it went, basically when it was

[00:41:22] effective. And, um, we were actually kind of surprised that it passed muster. It did have some

[00:41:27] challenges constitutionally and so on, but it looks like it's here to stay. And, um, a lot of,

[00:41:35] particularly real estate investors didn't like it because they've enjoyed a certain degree of

[00:41:39] anonymity in terms of where their money is, is parked and what they're investing in. And

[00:41:44] it was really designed to, um, combat money laundering and basically track the flow of funds.

[00:41:52] And, um, and it actually arose out of the treasury department and, and the agency that basically is

[00:41:58] spearheading all of it. It's, um, it's FinCEN for short. It's the financial crimes

[00:42:03] enforcement network. And, um, basically it requires that any owner, and that could be a shareholder,

[00:42:12] member, limited partner that owns more than 25% of the project, uh, in terms of its membership

[00:42:20] interest basically has to do this online reporting. And a lot of it's very similar to

[00:42:26] your certificates of beneficial ownership or the know your customer, uh, forms that you get from the

[00:42:33] bank that basically have your name, address, uh, social security number. Um, and they basically

[00:42:41] want to be able to, to track as well as a little information about the project itself. And so

[00:42:46] basically every member that has over 25% has to basically enter all of this information into the

[00:42:53] online system. Uh, boss is the acronym for it. And, um, there's something I'll tell you a little bit

[00:42:59] about the deadlines for that. In addition to people that own more than 25%, pretty much any sponsor for

[00:43:05] a deal, this, it pretty much affects almost every syndication we can think of, but any sponsor that's

[00:43:12] in a particular, that set up an LLC for a particular project is going to also have to enter that data

[00:43:18] into the online database. And again, this is a database that only the government's going to have

[00:43:23] access to. So it's not like a secretary of state website where you can just kind of look it up and

[00:43:28] find out that information. And then folks that they describe as the company applicant, which would

[00:43:34] be folks like me that actually form the entities. We also have to enter all of that data in there.

[00:43:40] So it sounds like a headache and to some extent it is, um, there are civil and, um, criminal penalties.

[00:43:49] Uh, so it's, it's not like something you can basically ignore if you basically fail to do it.

[00:43:57] And I'll, I'll get into the deadlines in a minute. Basically the civil penalty can be $500 per day for

[00:44:02] each day of the violation. And the criminal penalties can be up to two years in prison, um,

[00:44:09] and, or a fine of $10,000. So definitely something that you can't, uh, ignore now for entities that

[00:44:19] were created before January 1st, um, 2024, people have one, basically a year to comply. Although most of that

[00:44:30] year is already gone. So, uh, you know, until December 31st, 2024, you basically, you can, you know, that much

[00:44:38] time to comply for entities that were formed after January 1st, 2024. And before December 31st, 2024,

[00:44:47] you're going to have 90 days to comply. And then basically come January 1st, 2025, uh, you'll have

[00:44:57] 30 days to comply. Anytime you form a new entity. Cause it'll be part of the process is what their

[00:45:02] expectation is by that standpoint. Yeah. That's, that's exactly right. So it's just one of those

[00:45:06] things where a lot of it's been just getting the client's attention, offering to handle it for them.

[00:45:11] Um, and as you can imagine, a lot of these syndicators have dozens and dozens of entities.

[00:45:16] Oh yeah. Now, now one thing that's good, and actually this is worth writing down is if people

[00:45:20] are doing their own self-reporting on it, uh, which is achievable. I mean, you don't have to have your CPA

[00:45:26] or attorney do it, although it might be helpful in terms of navigating the process. But if you get what

[00:45:32] they call a FinCEN ID, what's nice is anytime there's a change in the information, which you,

[00:45:39] you do have to update stuff if it changes, like even if the address changes or something like that.

[00:45:44] Um, if you get a FinCEN ID, all you have to do is update that and that will cross pollinate or

[00:45:50] populate all of your other LLCs that you're basically one of the reporting individuals for.

[00:45:56] So that's an important thing to know instead of you having to do like a hundred or more separate

[00:46:00] filings on that as well. So, um, so that's one thing that we're seeing. And then I would say in

[00:46:05] this market, um, a lot of the acquisitions we're seeing are mostly self-funded, uh, been seeing a

[00:46:15] lot more credit union deals, although a lot of those have full recourse. So, um, they're not as

[00:46:19] popular with our syndicators. A lot of the work we've been doing have been basically loan

[00:46:23] modifications where maturity dates have come and gone. Um, they're not able to easily

[00:46:30] just refinance out of it. And so, um, a lot of it's been having to extend and pretend,

[00:46:36] um, maybe get, uh, provide credit enhancements and go through that process, but basically extend

[00:46:42] for maybe six months, maybe a year if you get it. But that's, that's the other thing that's keeping us

[00:46:47] pretty busy, fortunately. But yes, we're not doing as many traditional syndication, um, acquisitions

[00:46:54] as, as would be typical mainly because of how quickly interest rates accelerated, but hopefully

[00:46:59] with the more recent, uh, decrease and hopefully if the, um, the projections are correct about

[00:47:05] decreases, I guess through 2026, um, hopefully we'll start to see a little bit more activity.

[00:47:11] Um, but it'll be, it'll be gradual for sure. Yeah. You'll have both refinance and hopefully new

[00:47:17] acquisitions. Yeah. Yeah. That's a good way to, yeah. Win, win, I guess for the legal folks. Yeah.

[00:47:22] Yeah. Well, this has been great, man. I know we're coming up on our time and, um, you know,

[00:47:27] I feel like we covered some, some pretty detailed, uh, topics when it comes to commercial real estate.

[00:47:33] Do you practice throughout the nation or are you just in Virginia? I'm licensed in Virginia,

[00:47:39] North Carolina. My firm, we're licensed in 19 different States, but if for some reason we were

[00:47:46] doing a deal and say like Arizona and we didn't have somebody at my firm that was licensed there,

[00:47:51] we have a pretty extensive network of local council. So a lot of the heavy lifting we can do,

[00:47:57] particularly if it's a familiar client and they have a certain way that they like to have it done,

[00:48:01] but for state specific nuances, we need to collaborate with local council. That's basically

[00:48:06] how, how we do that. So there's certain things where making sure a deed's recordable, making

[00:48:11] sure the loan documents are enforceable in that state that we have to collaborate with, with local

[00:48:15] council, but that's, that's basically how we do it, uh, nationwide. Very cool. So if someone wants to

[00:48:20] get in contact with you, what's the best way to do it? Okay. Uh, I would say email is best,

[00:48:25] but I'll even give you my mobile phone. But, um, my email address is Richard dot crouch. And my last

[00:48:33] name is like crouching tiger C R O U C H. And then it's at woods, plural, Rogers, plural.com. So

[00:48:41] richard dot crouch at woods, Rogers.com and my mobile phone. Uh, and I will get the message,

[00:48:47] uh, pretty quickly is, uh, seven, five, seven, three, five, three, zero, nine, six, nine.

[00:48:53] Well, that's worth hiring you right there. If you give yourself, not a lot, not a lot of attorneys do

[00:48:58] that. So I'll just say that right now. So, and I'll, I'll obviously post that in the show notes as well.

[00:49:04] So, um, so yeah, thanks again for being here, man. This has been great. Certainly,

[00:49:08] certainly appreciate you having me. Thank you for joining me on this episode of the commercial

[00:49:23] real estate podcast. I hope you found today's conversation with our guests, both insightful

[00:49:28] and inspiring. If you have any questions or comments, or would like to connect with me or our

[00:49:33] guest, you can find all the relevant information and links in the show notes. I encourage you to reach

[00:49:39] out, share your thoughts and continue the dialogue. Don't forget to subscribe to the podcast to stay

[00:49:44] updated with our latest episodes and to explore more fascinating stories from the world of commercial

[00:49:49] real estate. If you've been enjoying the CRE project podcast, I'd greatly appreciate it. If you

[00:49:54] can take a moment and leave a review on your preferred podcast platform, your feedback helps us grow

[00:50:00] and improve before we part ways. Remember this in the dynamic world of commercial real estate,

[00:50:07] every experience is an opportunity to learn and grow. So keep pursuing your passions, stay curious

[00:50:14] and continue your journey. Thanks for being a part of our podcast community. I'll be back soon with

[00:50:19] captivating stories, expert insights, and valuable knowledge to empower your path in the realm of

[00:50:24] commercial real estate. Until next time, always keep in mind that the world of commercial real estate

[00:50:29] is filled with endless possibilities. Keep building, keep investing and keep dreaming big.